How Does VAT Work?

How Does VAT Work?


The VAT that is paid on the invoices for the purchases is deducted from the VAT charged and the difference paid to HMRC. This is done by completing a quarterly VAT return. Most of the small businesses are on the Cash Accounting Scheme in which you have to pay VAT on bills that have already been paid and receive credit for VAT on bills that you have paid.

There is, yet, another scheme – Annual Accounting Scheme in which you have to pay an agreed monthly fee against an estimated annual VAT liability, with a settlement at the end of the year.

Then there is a Flat Rate Scheme (FRS) where you have to pay VAT to HMRC at a fixed percentage of turnover but without deducting VAT on services and purchases.

Four Categories of VAT Rates

  • Exempt Supplies: These include finance, education, insurance, and the services of dentists and doctors except osteopaths. If you only supply exempt services, you can’t register for VAT since there is no VAT charged on exempt services. In case you are VAT registered but you have some exempt supplies, it may be difficult to claim back all your input tax.
  • Zero Rate: This category includes the charges on children’s shoes and clothing, prescriptions, books & newspapers, new house sales and prescriptions, and on most food except restaurants or takeaway meals. If you supply only zero-rated goods, you may not have to register for VAT but it is obligatory for you to apply for exemption from registration.
  • Reduced Rate: This includes a rate of 5% which includes power and fuel used in homes.
  • Standard Rate: This is applied to all goods and services and does not fall into the other three categories. From 15% in 2008 to 17.5% in 2010 to 20% in 2011, this has kept varying over the years.

VAT Inspection

How Does VAT Work?

If you are a VAT registered business, VAT inspection may happen at any stage. However, this does not mean that you have done something wrong. You need to ensure that at the time of inspection, all your records are readily available and that you and your team are able to answer the questions about the specific entries.

If you have an accountant who does your bookkeeping and completes your VAT returns, it is wise to have the records inspected at their premises. This may save you from stress and worries.

Ensuring Accurate Records

The VAT calculations are difficult and the chances of errors are increased if you perform these manually. If you want that the inspection must go smoothly and that you don’t have any erroneous records, it is better to add a great widget – the VAT calculator by Calconic to your website.

It calculates the amount of VAT that is to be paid or reclaimed and the gross price of the goods or services based on the net price. By adding this excellent widget to your website, you add simplicity to the complex tasks of calculations.